The contribution format income statement for Huerra Company for last year is giv

Question

The contribution format income statement for Huerra Company for last year is given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes e 40% Net income $992,000 $49.60 595,20029.76 396,800 19.84 318,800 15.94 3.90 31,200 1.56 $46,800 2.34 78,000 The company had average operating assets of $495,000 during the year Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each questiorn separately, starting in each case from the data used to compute the original ROl in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $104,000(The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $13,000 per year by using less costly materials 4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $11,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $8,000 per year 5. Sales are increased by 15%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $16,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $182,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock

Explanation / Answer

1

Compute the company return on investment (ROI) for the period

Margin

Net Operating income/ sales *100

Net operating income

78000

sales

992000

Margin:

78000/992000*100

7.86%

Turnover

Sales

992000

Average operating assets

495000

Turnover:

992000/495000*100

2.00404

Margin

7.86%

Turnover

2

ROI(Margin x turnover)

15.72%

2

Using lean production company was able to reduce the average level

of inventory by $104,000

Turnover

Sales

992000

Average operating assets

495000

Reduction in inventory

-104000

391000

Turnover

992000/391000*100

2.537084

Margin

7.86%

Reduce in inventory leads to decrease in operating assets shows no effect on Margin

Margin

7.86%

Turnover

2.54

ROI(Margin x turnover)

19.94%

3

The company acheives the cost savings of $13000 per year by using less costly materials

As there is savings in $13000 profit will increase and Turnover remains the same

Margin

Net Operating income/ sales *100

Net operating income(78000+13000)

91000

sales

992000

Margin:

91000/992000*100

9.17%

Margin

9.17%

Turnover

2

ROI(Margin x turnover)

18.35%

4

The company issues bonds and uses the proceeds to purchase machinery and equipment

Margin

Net Operating income/ sales *100

Net operating income(78000+8000)

86000

sales

992000

86000/992000*100

8.67%

Turnover

Sales

992000

Operating assets (495000+124000)

619000

1.602585

Margin

8.67%

Turnover

1.6

ROI(Margin x turnover)

13.87%

1

Compute the company return on investment (ROI) for the period

Margin

Net Operating income/ sales *100

Net operating income

78000

sales

992000

Margin:

78000/992000*100

7.86%

Turnover

Sales

992000

Average operating assets

495000

Turnover:

992000/495000*100

2.00404

Margin

7.86%

Turnover

2

ROI(Margin x turnover)

15.72%

2

Using lean production company was able to reduce the average level

of inventory by $104,000

Turnover

Sales

992000

Average operating assets

495000

Reduction in inventory

-104000

391000

Turnover

992000/391000*100

2.537084

Margin

7.86%

Reduce in inventory leads to decrease in operating assets shows no effect on Margin

Margin

7.86%

Turnover

2.54

ROI(Margin x turnover)

19.94%

3

The company acheives the cost savings of $13000 per year by using less costly materials

As there is savings in $13000 profit will increase and Turnover remains the same

Margin

Net Operating income/ sales *100

Net operating income(78000+13000)

91000

sales

992000

Margin:

91000/992000*100

9.17%

Margin

9.17%

Turnover

2

ROI(Margin x turnover)

18.35%

4

The company issues bonds and uses the proceeds to purchase machinery and equipment

Margin

Net Operating income/ sales *100

Net operating income(78000+8000)

86000

sales

992000

86000/992000*100

8.67%

Turnover

Sales

992000

Operating assets (495000+124000)

619000

1.602585

Margin

8.67%

Turnover

1.6

ROI(Margin x turnover)

13.87%

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